What the capital gains inclusion rate change means for professionals
What the capital gains inclusion rate change means for professionals
Discover how the 2024 federal budget's capital gains inclusion rate increase, now deferred to January 1, 2026, will affect professionals.
This article breaks down the new rules, the impact on professional corporations, and crucial transition guidelines for gains realized before and on/after January 1, 2026. Stay informed on how these changes may impact your tax obligations and financial planning.
Read on to learn more and see examples illustrating the financial effects.
The federal Minister of Finance and Intergovernmental Affairs announced on January 31, 2025, that the federal government is deferring the effective date of the capital gains inclusion rate increase from June 25, 2024, to January 1, 2026. The proposed implementation date for the increase to the Lifetime Capital Gains Exemption (LCGE) to $1.25 million has not changed and is effective as of June 25, 2024.
Legislation to implement these announced measures is still pending, with the government stating it will be introduced in due course.
In conjunction with this announcement, the Canada Revenue Agency (CRA) has reverted to administering the currently enacted capital gains inclusion rate of one-half and has provided certain administrative guidance for individuals, trusts, and corporations impacted by these changes.
CRA will grant relief in respect of late-filing penalties and arrears interest until June 2, 2025, for impacted T1 individual tax return filers, and until May 1, 2025, for impacted T3 trust tax return filers. For corporations that followed CRA’s guidance to file based on the increased capital gains inclusion rate effective June 25, 2024, CRA has indicated that it will coordinate corrective reassessments to reverse the application of the two-thirds inclusion rate.
The 2024 federal budget, entitled Fairness for Every Generation, was delivered by the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, on April 16, 2024 and proposed to increase the capital gains inclusion rate from 50 percent to 66.67 percent for capital gains realized on or after June 25, 2024.
The full implications of this announced change and recently announced deferral to January 1, 2026, will not be known until legislation is finalized and passed into law.
This article will provide background on the proposed increase in the capital gains inclusion rate from 50 percent to 66.67 percent and how it would impact professionals.
Capital gains inclusion rate
The capital gains inclusion rate is now proposed to increase from 50 percent to 66.67 percent for corporations and most types of trusts for capital gains realized on or after January 1, 2026.
Additionally, for individuals and select types of trusts, the inclusion rate will also rise, effective January 1, 2026, from 50 percent to 66.67 percent on the portion of capital gains exceeding a $250,000 threshold realized in a year.
Capital gains realized by corporations
Professionals that realize a capital gain in their professional corporation will pay about seven percent to 10 percent more income tax on capital gains realized on or after January 1, 2026, depending on their province of residence.
Consider the following example for a professional located in Ontario: Dr. A wholly owns shares of A Professional Corporation (APC). APC sells a marketable security and incurs a capital gain of $100,000. Dr. A will pay an extra combined personal and corporate income tax of $9,655 for selling the marketable security on or after January 1, 2026, compared to if the marketable security was sold before this date. This is because APC will pay more corporate income tax with the higher capital gains inclusion rate, leaving less cash available to pay as dividends to Dr. A.
APC cannot pay as high of a tax-free capital dividend to Dr. A with the increased capital gains inclusion rate. In addition, Dr. A will pay more personal income tax because a higher taxable dividend will need to be paid from APC to extract all the marketable security sale proceeds after corporate income tax has been paid.
This is illustrated as follows:
| Line item | Pre-June 25, 2024 | June 25, 2024 and onwards |
|---|---|---|
| Capital Gain Realized by Corporation | $100,000 | $100,000 |
| Inclusion Rate | 50.00% | 66.67% |
| Taxable Capital Gain | 50,000 | 66,667 |
| Corporate Income Tax | (9,750) | (13,000) |
| After-tax funds available | 90,250 | 87,000 |
| Tax-free Capital dividend | 50,000 | 33,333 |
| Taxable dividend | 40,250 | 53,667 |
| Personal Income Tax | (19,215) | (25,620) |
| Personal after-tax funds received | 71,035 | 61,380 |
| Effective Income Tax Rate | 28.97% | 38.62% |
| Net Tax Cost | 9,655 |
Capital gains realized by individuals: Under $250,000
The first $250,000 of capital gains realized by an individual in a particular year will remain taxable at a 50 percent inclusion rate. Therefore, professionals will pay the same income tax when realizing a capital gain on or after January 1, 2026, than they would have paid if they realized a capital gain before January 1, 2026, if the total capital gains realized in a particular year is less than $250,000.
This is illustrated for an Ontario professional as follows:
| Line item | Pre-June 25, 2024 | June 25, 2024 and onwards |
|---|---|---|
| Capital Gain Realized by Individual | $100,000 | $100,000 |
| Inclusion rate on first $250,000 | 50.00% | 50.00% |
| Inclusion rate on >$250,000 | 50.00% | 66.67% |
| Taxable Capital Gain | 50,000 | 50,000 |
| Personal Income Tax | (26,765) | (26,765) |
| Personal after-tax funds received | 73,235 | 73,235 |
| Effective Income Tax Rate | 26.77% | 26.77% |
| Net Tax Cost | 0 |
Capital gains realized by individuals: More than $250,000
Professionals that realize total capital gains of greater than $250,000 in a particular year will pay additional personal income tax on or after January 1, 2026, compared to if they realized capital gains before this date. The amount of income tax paid will depend on the professional’s province of residency.
It will also depend on the total amount of capital gains incurred in a particular year because the first $250,000 of capital gains are subject to the 50 percent inclusion rate whereas the capital gains beyond $250,000 are subject to the 66.67 percent inclusion rate.
Consider the following example for an Ontario professional: Z is a lawyer who personally owns the property in which they operate their law practice. Z sells the property and incurs a capital gain of $1,000,000. Z will pay additional personal income tax of $66,912 for selling the property on or after January 1, 2026, compared to if the property was sold before this date. This is because the first $250,000 of capital gain will be taxed with an inclusion rate of 50 percent, whereas the remaining capital gain will be taxed with an inclusion rate of 66.67 percent.
This is illustrated for an Ontario professional as follows:
| Line item | Pre-June 25, 2024 | June 25, 2024 and onwards |
|---|---|---|
| Capital Gain Realized by Individual | $1,000,000 | $1,000,000 |
| Inclusion rate on first $250,000 | 50.00% | 50.00% |
| Inclusion rate on >$250,000 | 50.00% | 66.67% |
| Taxable Capital Gain | 500,000 | 625,000 |
| Personal Income Tax | (267,650) | (334,562) |
| Personal after-tax funds received | 732,350 | 665,438 |
| Effective Income Tax Rate | 26.77% | 33.46% |
| Net Tax Cost | 66,192 |
The nuances of draft legislation
The $250,000 threshold for the 50 percent capital gains inclusion rate will apply to capital gains realized by an individual (not a corporation) in a year, either directly or indirectly via a partnership or trust, net of any current year capital losses.
It does not apply to income earned by a trust unless the trust is a graduated-rate estate trust or a qualified disability trust.
The $250,000 threshold will factor in tax deductions taken for capital losses from other years applied to reduce capital gains in the current year. It will also factor in exemptions like the lifetime capital gains exemption, the employee ownership trust exemption, and the proposed Canadian Entrepreneurs’ Incentive.
Recent changes to the alternative minimum tax will also need to be considered when determining the amount of income tax payable by an individual that incurs a capital gain.
Our team can help you learn more about how these changes will impact you and your practice. Reach out today to Michael Saxe at [email protected] or Nicholas Talarico at [email protected].
Michael Saxe , CPA, CA, TEP, LL.M
Nicholas Talarico , CPA, CA
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